Summary

In comparing the impact of corporate taxation and social insurance on foreign direct investment (FDI) and unemployment, the paper derives four main results: (i) the optimal size of the welfare state depends on the degree of risk-aversion, the unemployment rate and the excess burden of labor taxes. Unemployment partly reflects the country’s exposure to globalization; (ii) corporate taxation and social insurance can have equivalent effects on unemployment and outbound FDI; (iii) while an increase in the corporate tax raises corporate tax revenue, it is likely to worsen total fiscal stance; (iv) a corporate tax should be used to contribute to welfare state financing only in exceptional cases.

JEL-Classification

F21H21H53J64J65

Keywords

corporate taxforeign direct investmentunemploymentwelfare state

Notes

I am grateful to seminar participants at the annual meeting of the Swiss Economic Association 2009 for helpful comments.